On February 10, 2015, the United States Court of Appeals for the Ninth Circuit affirmed a district court’s ruling that St. Luke’s Health System’s acquisition of the independent physician group Saltzer Medical Group violated the antitrust laws.  This appellate victory is another in a series of recent government wins.  More importantly, this case demonstrates that courts are unlikely to deviate from traditional antitrust merger analysis even when a transaction arguably furthers the “laudable” goals of high-profile legislation, such as the Affordable Care Act (“ACA”).

Takeaways  

Below are some practical takeaways from the decision:

  • Efficiencies Defenses Are Viewed With Skepticism, Even When They Relate To The ACA’s Goals.  The Ninth Circuit stated that whether efficiencies could be used as a merger “defense in this circuit remains uncertain” and that it “remain[s] skeptical about the efficiencies defenses in general and about its scope in particular.”  Among other arguments, St. Luke’s argued that the merger would allow St. Luke’s to move towards the integrated care and risk-based reimbursement encouraged by the ACA.  The Ninth Circuit concluded that although “better service to patients” was “a laudable goal,” “the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.”  Put another way, the Ninth Circuit agreed with the district court that the parties’ efficiencies arguments, which some would say were consistent with the ACA’s recognition of benefits of integration, did not outweigh the likelihood of anticompetitive effects from the merger.
  • Market Definition Remains Critical.  Once the FTC was able to establish that the relevant geographic market was limited to the small Idaho city of Nampa, the FTC was easily able to obtain a legal presumption based on market shares/concentration that the transaction was anticompetitive.  As in many merger cases, this legal presumption proved decisive.  When forced to prove their case in litigation, the agencies rely heavily on market definition and concentration in order to try to benefit from this legal presumption, despite the fact that 2010 Merger Guidelines appear to minimize the importance of market definition and concentration in evaluating a merger. 

Background  

As described in more detail in our prior article discussing the district court opinion in this matter, St. Luke’s follows on a series of FTC’s wins against the transactions in ProMedica Health System (2011), Rockford Health System (2012) and Phoebe Putney (2013), and the FTC’s success in administrative litigation and the related appeals involving the consummated deal in Polypore (2013).1

In 2012, St. Luke’s, a healthcare system operating in and around Nampa, Idaho, acquired Saltzer Medical Group P.A., Idaho’s largest independent, multi-specialty physician practice group in a transaction that did not require an HSR filing.  The FTC filed a complaint to block the acquisition on March 12, 2013.2  After a 19-day trial, the district court ruled that the transaction violated Section 7 of the Clayton Act and ordered divestiture.  

On appeal, the Ninth Circuit concluded that the district court did not clearly err in finding that the relevant market was limited to Adult Primary Care Services sold to commercially insured patients in Nampa, Idaho.  The defendants disputed the geographic market definition, but the Ninth Circuit was unconvinced in part because the evidence indicated that in the event of a small but significant non-transitory increase in price, neither insurers nor consumers would “change their behavior.”  The Ninth Circuit explained that the district court “correctly focused” on the likely response of insurers because insurers, as opposed to patients, are the “direct purchasers.”  The court noted that patients are “largely insensitive” to price and the residents of Nampa “strongly prefer access to local” primary care.  As a result, insurers “must offer” Adult Primary Care Services in Nampa “to effectively compete” for Nampa residents and could not “defend against” a price increase by “steering consumers to non-Nampa” primary care physicians.

With a narrow geographic market definition in hand, the government established its prima facie case on the basis of concentration levels in that market.  The post-merger Herfindahl-Hirschman Index (“HHI”) in the market was 6,219 and the change in HHI as a result of the merger was 1,607, which was “well above the thresholds for a presumptively anticompetitive merger.”3

The Ninth Circuit also concluded that the district court did not clearly err in ruling that the defendants’ efficiencies arguments failed to rebut the presumption. St. Luke’s argued that the merger would allow it to move towards the integrated care and risk-based reimbursement encouraged by the ACA, and would also benefit patients through the broader use of St. Luke’s electronic medical records system.  The court ruled these efficiencies were not merger specific (i.e., the merger was not necessary to realize the efficiencies), and that, even if they were merger specific, they did not adequately rebut the government’s prima facie case.  The Ninth Circuit concluded that although “better service to patients” was “a laudable goal,” “the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.” 

Finally, the Ninth Circuit ruled that the district court did not err in ordering St. Luke’s to divest Saltzer as the appropriate remedy.  St. Luke’s argued that the district court abused its discretion in ordering divestiture—and should have ordered a conduct remedy that would have allowed the parties to remain merged—because divestiture would not restore competition and would eliminate the claimed benefits of the transaction.  The Ninth Circuit rejected this argument, noting that divestiture is the “customary form of relief” and that the district court had “ample basis” because, among other things, St. Luke’s had previously assured the district court that divestiture was feasible.